Ladies and gentlemen, thank you for standing by, and welcome to the iRhythm Technologies Incorporated Q1 2020 Earnings Conference Call. At this time, all participants lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would like to hand the conference over to one of your speakers, Ms. Leigh Salvo of Investor Relations. Thank you. You may begin your conference..

Thank you, all, for participating in today’s call. Joining me are Kevin King, CEO; Matthew Garrett, CFO; and Dan Wilson, EVP, Strategy, Corporate Development and Investor Relations. Earlier today, iRhythm released financial results for the first quarter ended March 31, 2020. A copy of the press release is available on the company’s website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, those statements related to the impact of COVID-19 on our business, expectations for economic recovery, market expansion and penetration, productivity improvements, reimbursement, release of clinical data, operating trends and our future financial expectations, including revenue, gross margins, profitability and operating expenses, are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Annual and Quarterly Reports on Form 10-K and Form 10-Q, respectively, with the SEC.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2020. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

And with that, I’ll turn the call over to Kevin..

increased market penetration with our single Zio platform, increased operating leverage through continued productivity and automation improvements, and expanding our addressable market into new indications and geographies.

And with that, I would like to turn it over to Matt Garrett, our CFO, for a more detailed review of our Q1 2020 financial results.

Matt?.

revenue growth of 31% year-over-year and sequential growth of 8%; gross margins of 74.7%, inclusive of one-time inventory adjustments as announced in Q4 of 2019; continued traction and expansion of our Zio AT market launch, making our MCT monitoring solution available to all customers across the country; and finally, sustained sales force productivity levels through the development and onboarding of new reps, investments in our sales organizational infrastructure, continued penetration of large integrated systems and, of course, the launch of Zio AT.

Taking a more detailed look at the first quarter financial results. Revenue for the three months ended March 31, 2020 was $63.5 million, an increase of 31% year-over-year and 8% sequentially. Management has determined that revenue was negatively impacted in the quarter by the COVID-19 crisis on two fronts.

First, the company booked additional reserves due to expectations of lost patient insurance and co-pay patient payments lower than historical averages; and secondly, the company has estimated that lower registrations and unit intake in the latter-half of March had a material impact on Q1 revenues.

In total, the company has determined the impact of loss revenue in the quarter to be approximately $2 million.

Despite the impact of COVID-19 on the business, we would like to continue to highlight some of the trends we are seeing which support our confidence in the business and in our ability to be ready to expand our footprint when we come out of this current environment.

These trends include continued improvement and sustainability of sales productivity levels with significant number of reps surpassing $2.5 million in annual revenue productivity. Despite the late March impact of COVID-19, we continue to see strength in new store revenue growth, where new store revenue growth mix increased to 45%.

We view this mix as a positive sign of our ability to penetrate new accounts in a post COVID-19 environment, while still growing same-store accounts with both Zio XT and AT. And finally, in the last three weeks of March, the company successfully transitioned our business to support home versus in-clinic enrollment.

Specifically, home enrollment over the past month now accounts for more than 50% of registrations and the company has the ability to support all registrations through home enrollment as necessary moving forward.

In summary, these trends continue to demonstrate our ability to scale our high-volume business and our flexibility to support virtual care moving forward in a meaningful way. Turning our attention to the rest of the P&L. Gross margin for the quarter of 2020 was 74.7%, compared to 75.6%, a 0.9% decrease in gross margin over the same period of 2019.

The gross margins as adjusted for one-time items in the quarter and the additional COVID-19 reserves was approximately 76.1%, or a 0.5 percentage-point improvement over the same period in 2019.

Non-adjusted operating expenses for the first quarter of 2020 were $56.7 million, compared to $44.8 million for the same period of the prior year, an increase of 27%. Excluding costs associated with Verily development, OpEx was $56.1 million, or an increase of 25%.

In the quarter, OpEx was adjusted for the impact of COVID-19, where bonuses and some stock comp expense were eliminated or reversed. In addition, the company booked approximately $1 million of incremental bad debt expense in the quarter due to anticipated impact of COVID-19 for lost patient insurance and impact on lower copayments.

Finally, the net loss for the first quarter of 2020 was $9.1 million, or a loss of $0.34 per share, compared with a net loss of $8.3 million, or a loss of $0.34 per share for the same period of the prior year. Turning to our expectations for the remainder of 2020.

As was announced as part of the 8-K filing on Thursday, April 9, the company has suspended guidance until which time management feels confident that internal expectations on revenue and operating expense can be reestablished and communicated publicly.

We do, however, want to communicate to investors the following activities and steps the company is taking to ensure the long-term sustainability of the business.

First, that the company’s ability to transition from in-clinic to home enrollment operational environment was key in our ability to maintain meaningful registrations and revenue streams during this challenging period.

And second, that the company has taken significant steps to decrease our expenditure profile and current spending run rate by reducing current employee expenditures, new hire freezes, eliminating cash bonus plans and materially lowering travel and consulting expenditures.

With these steps, the company intends to lower cash burn to the largest extent possible, while still maintaining our ability to deliver benchmark services to our customers. With over $120 million of cash on hand, the company is in good position to weather any near-term challenges and to step up investment at the appropriate place in time.

Kevin, Dan and I would now like to open the call for questions, and I turn it back over to the operator..

Thank you, speakers. [Operator Instructions].

Operator, we’re ready to take the questions, please..

All right. Your first question comes from the line of David Lewis. Your line is now open..

Good afternoon, and thanks for taking the question. I appreciate the comments on assumptions of the April into April recovery or April stabilization. I just wonder if you can kind of provide any additional feedback on sort of some of the trends you’re seeing in – into early May.

And is it reasonable to assume that we get back to growth as early as the third quarter? And then I have a couple of quick follow-ups..

Sure. Hi, David. This is Kevin. Okay. I think, there’s three levels that you need to consider or we’re considering when we’re projecting the near-term. And the first is the strength of the iRhythm platform and our ability to deliver the service.

We just have extreme confidence that our platform and services are going to be preferred over alternatives and that the proven and complete nature of what we do every day resonates more with customers. As for the second thing that we need to take into account here is account readiness and outlook.

And as I mentioned in the prepared remarks, account readiness in these plans are taking shape, while I’m sure you’ve heard lots from other customers and other companies as well. Accounts are building their plans that include telehealth, home enrollment to sustain operations, et cetera, and we think that this is going to help also looking forward.

The real wildcard though was the third one, which is what are the expectations for regional recovery? And not all regions right now look the same and not all regions have the same level of risk. So this is the hard thing for us to view. We’ve seen, for example, in the Northeast, steady declines.

We see in California, a steady rate, a low, but steady rate. But in other parts of the country, we’re still increasing anywhere from 10% to 50% over like a seven-day average. So our view of what we’re able to do going forward is more predicated by that regional recovery outlook than it is anything.

We’re certainly optimistic with the trends that we’re seeing late April, early May. But I don’t know if we have enough data points just yet to make a call on whether or not this is a Q2, Q3-type timing. I think it’s all going to depend upon that regional recovery trend..

Okay. Very helpful, Kevin. I’ll just ask two more quick ones and I’ll jump back in queue..

Yes, sure..

First, just sort of give us any sense of the kind of installation you’re seeing from either the use of AT in acute care settings or Zio Suite plus home patch solutions.

So, what installation are those offerings providing? And then any update on Verily development timelines or any implications for development timelines in light of COVID? Thanks so much..

Yes. Sure. Yes, look, home enrollment is an incredibly value-add service that we have. We’ve always had it in place, so what was a relatively low percentage of use in the earliest days. And so we weren’t ready to take this on.

And as we said in our call, it’s ramped up to over 50% of our volume, and I think our customers greatly appreciate the quality at which we do that.

If one looks on our website, we’ve got a comparison of in-clinic to home enrollment performance metrics and the performance metrics from patient wear time, diagnostic yields, signal quality, returns and all that stuff are essentially equivalent. And so that is greatly helping our customers as they become more and more comfortable with telehealth.

AT is a new story for us. And in this COVID environment, as I mentioned, both inpatients and patients that are being transferred to outpatient are increasingly wearing Zio as the risk of atrial and ventricular arrhythmias in these infected patients come to bear.

So we’re extremely happy about that and extremely happy about Zio Suite tying everything together for us.

The second part of your question, David, I just – was there a second part to that?.

Are there impacts with Verily, Kevin?.

Yes. Dan, do you want take the Verily one? You were at the recent meeting with the Verily guys..

Yep. Will do, Kevin. Hey, David. And so as Kevin mentioned in his prepared remarks, we continue to make progress on the development of an end-to-end solution. And we recently crossed a milestone a few days ago that will trigger a milestone payment in the second quarter.

The hiring freeze that we implemented did impact some roles we were planning to fill for this project, but we’re certainly doing our best to maintain timelines despite that. And so at this time, we don’t expect any timing delays and we’re certainly pleased with the development thus far, kind of, call it, nine months into the collaboration..

Thanks, Dan..

Your next question comes from the line of Margaret Kaczor. Your line is now open..

Hi, everyone. This is Brandon on for Margaret. Thanks for taking the question. I guess, first, just starting kind of on Zio XT as we’re moving to a more telemedicine world and perhaps this is even here to stay as we go forward.

How do you guys feel about the reimbursement coverage under the telemedicine world? Is there a broad coverage that patients can just call up, do a telehealth, and there doesn’t have to be any in-person tests? So how does that kind of track? And is that going to be sufficient for you guys to kind of recover through the year?.

Hi, Brandon. This is Kevin. So the telehealth visits are generally done physician to patients and that’s a healthcare provider or physician responsibility to bill for. The prescription of Zio, whether the service is on in-clinic or remotely, bill the same way.

So there isn’t any component to the technical fee that we receive for Zio that’s impacted, whether it’s home enrollment or in-clinic enrollment..

Okay, that’s helpful. And then switching gears to Zio AT, the comments that you guys have made on AT being used in the inpatient setting was especially interesting given – I think in the past, when you’ve talked about this market for AT, it’s generally been an outpatient real-time monitoring market.

So I guess, the question is what are the capabilities of Zio AT compared to some of the traditional inpatient? I think they maybe use some more aggressive 12-lead ECGs.

And is this a potential market that you guys can kind of get into moving forward? Can you – can the inpatient market also be used for Zio AT in the long-term, or is this a temporary COVID market? Thanks..

So in answering the second question first, I think that market has to be developed.

Right now, there is a – in many instances, there’s a shortage of monitored beds in hospitals, whether they are in the critical care units, ICUs and CCUs, or they are in the step-down telemetry wards, and there aren’t enough beds to monitor – there aren’t enough monitors to monitor patients.

So Zio AT has been called into action in these situations to monitor patients for life-critical-related events with great success. We had good feedback from customers about the accuracy of Zio relative to their real-time telemetry monitors, for example. It is something new that has emerged over time.

We did receive FDA permission, if you will, to use it as an inpatient monitor for these particular instances, and we’re really pleased with that. And we’re just going to have to see where it goes going forward, whether it remains a key use in hospital. We’ll have to work on that as we work our way through the pandemic here.

A little bit early for us to tell, I think..

Great. Thanks for taking the questions..

You bet, Brandon..

Your next question comes from the line of Cecilia Furlong. Your line is now open..

Hi, Kevin, Matt and Dan. Thank you for taking the questions. I wanted to ask just COVID’s impact on and use in-hospital settings.

How do you see this, one, kind of expanding Zio’s utilization within the hospital and beyond your traditional cardiology and EP target centers? And what does that do for Zio’s kind of presence within the hospital longer-term?.

So, Cecilia, you’re referring to using Zio as an inpatient service?.

And just expanding beyond cardiology and EP and with COVID acting as a driver for that expansion going forward?.

Yes. So we’ve talked a lot about this, the power of our digital platform and our focus on large integrated delivery systems, where users – the walls of the users have expanded beyond cardiology and EP. Those include the emergency departments, neurology, in many cases, primary care or general medicine.

And I think given the environment we’re in now, particularly with the movement to telehealth, we’re optimistic that this is going to continue to build awareness amongst those various physician groups and also demonstrate the value of what we have.

As far as using it inside the hospital as an inpatient, it was just – I just sort of answered that with Brandon, and I think with Brandon, and I think, it’s a little bit too early for us to tell.

Although the value we are seeing out of Zio AT in these transferred patients and in these select cases with COVID-19 infections is quite dramatic and we’re actually very pleased about that..

Okay. Thank you.

And I guess, just looking forward, moving kind of past COVID, how are you thinking about home enrollment as a percentage of your business? But really, the impact this could have, one, on sales force productivity, as well as how you view kind of a long-term sales force at scale?.

Yes. So, there is no governor on our ability to scale home enrollment. This is a service that runs through Zio Suite, the information system that we deployed at the beginning of the year and formally, when Zio reports its predecessor.

As I said earlier in the prepared remarks, this service does take a little bit longer, mostly because we’re mailing directly to the patient as opposed to mailing bulk to the account and having them do the patch application. Aside from that, it’s perfectly scalable for us to continue to do this.

In conversations with many of our customers, telehealth was something of interest to a lot of people, but it didn’t seem that there was a driving force behind them. And COVID has forced customers to engage in telehealth with great success or good success.

And as a result of that, any hesitancy that one might have ordered – one might have had to order a Zio through a telehealth application has pretty much gone away.

And that’s highlighted also by the data that we have on our website, the comparisons of in-clinic to home enrollment, quality of service, outcomes to patients, patient satisfaction and things of that nature. I think it’s here to stay and I think it’s going to be a market expander for us.

And I would just add that home enrollment is – as I said in the prepared remarks, is more than just delivering a device to a patient’s doorstep.

It’s really enabling that entire end-to-end service to take place, prescribing, making sure the data is accurate, providing 24/7 information, independent of a platform that the caregiver or the patient is using, a mobile phone, a tablet, a desktop computer or a laptop, all of this service can be remotely managed through any type of a hardware platform, if you will..

Great. Thank you, Kevin..

You bet..

Your next question comes from the line of Suraj Kalia. Your line is now open..

Sure. Good afternoon, everyone. So, Kevin, two questions for you and one for Matt. What percent of Zio XT, if I look over the last four to five quarters, is used, let’s say, within the two to seven-day bucket? And also, there has been a lot of mention about use of AT in the inpatient setting, specifically related to COVID.

Could you care to characterize what volume contribution was received, let’s say, in the last two weeks of March, let’s say, or even April and early May? And Matt, for you, assuming the unemployment scenario increases, the way reserves are calculated for bad debt and patient co-pays, is it still going to be the portfolio approach, or is there going to be any switch to any extent whatsoever? Gentlemen, thank you for taking my questions..

Sure, sure. Hi, Suraj. Good to hear from you. In terms – I’ll take the Zio AT one first. In terms of Zio AT volumes, as they relate to response to COVID, I would say Zio AT volumes are up by a factor of two to three easily in the short period of time.

Relative to Zio wear times, well over three quarters, they’re going to be 85% of our prescriptions, are for 14 days. And the average wear time for those is like – I think the last time we posted this was about 13.8 days. The vast majority of people are realizing the benefits of long-term continuous monitoring relative to shorter alternatives.

We’ve presented data on 500,000 sequential patients and we noted the percent of time cardiac arrhythmias occurred after day seven, where those cardiac arrhythmias were the first events and they were life-critical events, heart pauses, complete heart block, ventricular tachycardia, et cetera.

So there’s probably evidence for them, and I think the medical community is beginning to realize that.

Matt, do you want to take the question on bad debt?.

Sure. I think there’s two parts of that question, Suraj. The first part is related to the non-contracted portion of our business, so our average collection rate. And then we do take a portfolio approach of looking at that and have made appropriate adjustments.

As it relates to bad debt expense, obviously, we are going to be monitoring that very carefully. We did a preliminary analysis based on a very short time frame. And the challenge is trying to come up with anything from an historical perspective, that matches where we are today. And the answer is there isn’t anything.

The good news, I think, that we all feel is whether it’s a V or a U-shape recovery, that the hope and intent is that it’s nothing like an extended long-term period of time with people out of work and thus having issues from ability to pay. But we’ll continue to monitor it carefully and update accordingly on a quarterly basis..

[Operator Instructions] Your next question comes from the line of Robbie Marcus. Your line is now open..

Great. Thanks for taking the question. I’ve been bouncing between calls, so if this has been asked, apologies. But in our diligence, we’ve had a lot of doctors say that this could open new doors for – in how they treat patients longer-term and could help accelerate the transition to Zio and Zio AT away from Holter over time.

Is that something you’re thinking about? And how are you preparing to capitalize on that longer-term?.

Sure. Hi, Robbie, Kevin. Thanks for the question. Yes. Certainly, in our work that we’ve been doing, there’s two things that are behind that question.

One of them is that, customers tell us their staff and it’s likely that patients are not going to – this isn’t great English, but not going to want to interact with devices that have been worn by other patients because of the potential risk of contaminants and so forth. So – or it’s unlikely that they will.

And so single wearable devices will be preferred and this will help drive further adoption. I think the second part is that, people are seeing just an incredibly high level of quality in patient data that they hadn’t seen before.

I can speak to this from the early work that we’ve seen here with AT in these inpatient hospitals – in inpatients in hospitals and in telemetry applications, as well as in the home enrollment application, where a patient can apply as themselves and we end up getting the same or better – the same level of quality information, the same level of wear time.

I think it’s only going to help accelerate that adoption that we’ve been working on for so long in terms of getting away from technology that’s 40 or 50 years old. Nothing like a crisis to help accelerate change, right? We’re seeing that also with telehealth in terms of physician adoption.

They’re embracing this more and more as a result of the need rather than – or the necessity rather than just the need..

Great. Maybe just as a quick follow-up. Has there been any impact to timelines on the Verily collaboration? Thanks..

Yes..

Hey, Robbie. It’s Dan..

Oh, go ahead, Dan. Yes, go ahead, please..

Sorry, Kevin. Robbie, that was one question you missed earlier. No impact to overall timing. In our prepared remarks, we mentioned that we recently surpassed a development milestone and expect to pay out a milestone payment in the second quarter. So no update or no change to the overall timing of that project..

Sorry about that. I guess, that’s what happens when I listen at four calls at once. My apologies..

No worries..

No worries..

[Operator Instructions] Your next question comes from the line of David Rescott. Your line is now open..

Hey. This is David on for Kaila Krum. Thanks for taking my question. I was wondering if you guys touched on a little bit around the Zio AT use for COVID patients in both the inpatient and outpatient setting.

And I was wondering if you would be able to either quantify or tease out what kind of net benefit you guys have seen from those type of patients versus just the downturn overall in the second-half of March?.

Sure. David, just a clarifying point, by benefit, are you referring to a clinical benefit or financial benefit? Help me understand a little bit more..

Yes.

Yes, just trying to tease out kind of what the – I guess, the number of patients or the amount of revenue overall that you guys had in the quarter from either patients that were on an inpatient setting for COVID or those who kind of were in the outpatient setting for use for COVID – patients affected by COVID?.

So, we do not – we don’t break out product line specific information. A couple of things to sort of put some corners on this. We noted the impact here of COVID-19 around March 16, so we had two weeks in the quarter. So there wasn’t much time in a quarter to have a whole lot of impact, if you think about it that way.

Since that time, we’ve seen increased demand for AT in the environments that I described on the call. Patient transfer to outpatient status were in Zio AT.

This frees up inpatient beds for people that are at risk of lethal arrhythmias, and we’re also seeing it in Zio AT inpatient settings for Q2 monitoring, an instance, again, where there’s lack of available bed overall. But we’ve not broken out that in terms of volume..

Okay. Thanks. And then maybe just – I know you talked about kind of the home enrollment.

Have you guys provided any color around whether the – or the breakup, I guess, of those types of patients whether beyond Zio AT or Zio XT?.

Yes. The home enrollment can be either. And I would say, the vast majority of it, just based upon the mix of our business, is Zio XT right now..

That’s correct..

But Zio AT is a home enrollment or a home-enabled application as well..

All right. Thanks..

Yes. You bet..

[Operator Instructions].

Operator, I think, we’re done with the questions for today and we would like to conclude the call, please..

I’m showing no further questions at this time. I would now like to turn the conference back to Mr. Kevin King. You may continue..

Thank you, operator. Thank you, everyone, for joining our Q1 2020 earnings conference call. We hope you all remain safe and healthy during this period of time.

We remain totally confident in our ability to navigate through this period and believe the advantages of our proven and complete platform are resonating with customers and their needs more than ever. We appreciate your interest and look forward to updating you as progress unfolds. Take care..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..